A small Michigan insurer is trying a novel way to persuade young, healthy people who lack health insurance: let them buy lots of coverage after they get sick.

American Community Mutual Insurance Co. is rolling out an unusual two-tier coverage plan now that would give policyholders struck by serious illness or accidents the choice of adding $5 million of coverage.

POLICY INITIATIVE

- The News:

An insurer launches an unusual health policy that lets people pay money for up to $5 million in additional coverage after they get ill.

- Target Market:

Young and fit adults who are shopping for a good deal and have an aversion to $5,000 deductibles.

- The Bottom Line:

Insurers are trying to register individuals as more employers give up providing benefits. However, this new policy is not for everybody.

Registering individuals is critical to insurance-industry growth as more employers give up providing company-paid health benefits, and carriers are keen to limit big claims by courting the 40% of uninsured who are 19 to 34 years old and healthy - the swiftly growing segment of uninsured Americans.

Industry experts state they have never seen a policy like American Community has established in Texas today under the name "Coverage on Demand." A similar plan will be out early next year in Michigan, Ohio and Missouri as "Pay-As-You-Go.” Taken as a whole, the company looks forward to offer this product line in more than 13 states within the next year.

Here is how it works:

A consumer buys one of three limited-benefit plans – known as Tempo, Rhythm or else Groove -- with annual benefit caps of $1,000, $2,500 or $5,000, correspondingly. Deductibles range from zero to $500. The cost of the plan for a healthy 25 years old man in Dallas, for instance, would be $88 to $95 a month, the company states.

The twist comes when a person gets seriously ill or hurt and goes beyond the modest benefit cap. Under Coverage on Demand, policyholders can pay a lump-sum annual "activation" premium of $9,000 to $10,000, on top of the basic premium, to get a guaranteed $5 million of catastrophic coverage for that year. American Community puts forward to finance that amount through an outside company in excess of three years, along with interest.

According to Mike Grandstaff chief executive of American Community's new Precedent Insurance unit, which is selling this plan in Texas, "it's the right to hindsight in health insurance," The Company decided on Texas since it has the maximum percentage of uninsured among its population, around 27%, or 5.6 million people. The average annual premium for individuals in Texas is $2,836, according to an industry trade group. Mr. Grandstaff states that it remains to see how well it will work: "Who are we going to draw? Whom will we maintain as customers? How will they perform? Time will inform."

Many individuals draw back at paying annual premiums of roughly $2,500 for a standard major-medical policy that typically covers most hospital, doctor and drug costs. In reaction, leading insurers for instance WellPoint Inc. and UnitedHealth Group Inc. have brought plans that cost less than $1,000 a year for young people, who are less probable to suffer major medical setbacks. The downside for some is that the annual deductibles run from $1,500 to $5,000. WellPoint plays to this demographic with policies dubbed Thrill-Seeker, Calculated Risk-Taker and Part-time Daredevil.

Another low-cost option has been limited-benefit plans, also identified as "mini-medical," that have small or no deductible. The premiums are low, possibly $800 to $1,000 a year, but so are the annual benefits, typically limited at $5,000 to $25,000. Critics regard many limited plans as poor value, because they lack the catastrophic coverage required to guard people from crippling medical bills.

Products with low-dollar caps or high deductibles can be beneficial for insurers, though. American Community, based outside Detroit in Livonia, Mich., estimates less than 70 cents of each premium dollar will go in the direction of medical care on its new policies, though margins maybe squeezed if a lot of people who buy the plans land up filing significant claims. Traditional group plans use more premium dollars however; companies incur less cost by enrolling a large group at once.

Under American Community's plan, people who activate the $5 million in extra coverage revert to their original benefit cap of $5,000 or less when their policy renews every year. This means a person diagnosed with cancer or facing lengthy care after an accident would have to pay a heavy sum each year to keep catastrophic coverage; typical major-medical premiums, by contrast, go up modestly every year, whether you are sick or not. Moreover, even under the $5 million coverage, the company continues to impose certain exclusions and cost sharing, for example, consumers must pay 40% of prescription drug bills that could leave customers paying considerable medical bills out of their own pockets.

For those causes, some industry experts inquiry the value of this new policy for customers, and they put across concern that a lot of insurers are focused on drawing the young and healthy and turning away from elder, sicker people who most call for help.

American Community says its marketing campaign tries to deter anybody other than the young and healthy from even searching for a policy, and its online application points out exclusions in coverage for antidepressants, motherhood and other items. Television and radio ads show young people going overboard, buying costly golf clubs and downing enormous amounts of vitamins, to underline the campaign's message, 'Don't buy more insurance than you need'.

Customers with the policy who do get sick would be better off longer term searching other coverage through a new job or a state run insurance program.

The company acknowledges the activation premiums are high, but states it is better than facing a $500,000 hospital bill. The company states that the annual premium increases will be tied to general medical inflation and their own claims trend, not specific policyholder claims.

Others are following alike ideas. Tennessee Gov. Phil Bredesen, a Democrat, started a state subsidized $25,000 limited benefit plan earlier this year for small businesses and their uninsured workers, with monthly premiums of $150 split consistently among employer, worker and the state. Further than 5,000 workers are covered under the insurance. To counter criticism that the coverage is fragile and to make it more striking, Mr. Bredesen is exploring the addition of catastrophic coverage if federal money is obtainable.

In July, Am WINS Group Inc. a large insurance wholesaler based in Warwick, R.I., began marketing a limited-medical plan to employers that incorporates catastrophic coverage. The typical plan offers $25,000 of immediate coverage and the catastrophic plan kicks in after $50,000 of medical claims, leaving the worker to cover the amount in the between. Sam Fleet, Am WINS Group Benefits president, states that this design makes the monthly premium cheaper than a more traditional major-medical policy. In addition, he competes it meets most people's requirements, based on his own research showing 97% of people by no means go beyond $25,000 of annual claims, not including prescription drugs.

Yet limited benefit plans, even with additional bells and whistles, persist to carry a stigma among many employers and individual consumers. American Community tried to get Texas insurance regulators to authorize it to market Coverage on Demand as a major medical policy, given the potential $5 million benefit. However, Texas officials rejected that reasoning and forced the company to post a well-known disclaimer on all marketing materials that it is a "limited benefit policy."

American Community is also conducting experiments with how best to sell this new type of policy. In Texas, its Precedent Insurance unit is cheering young and healthy people to sign up online through lighthearted television, radio, print and Internet advertisements. The company also states that its objective is to give about 80% of online applicants a yes or no within a matter of minutes other than days or weeks.

Tia Goss Sawhney, chief strategy officer for Precedent, states that consumers would like health insurance to work more like other services, of the similar kind to buying a prepaid cell phone and buying further minutes when required.